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Motorola Solutions Inc  (NYSE:MSI)
Q3 2018 Earnings Conference Call
Nov. 01, 2018, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, and thank you for holding. Welcome to the Motorola Solutions Third Quarter 2018 Earnings Conference Call. Today's call is being recorded. If you have any objections, please disconnect at this time. The presentation material and additional financial tables are currently posted on the Motorola Solutions' Investor Relations website. In addition, a replay of this call will be available approximately three hours after the conclusion of this call over the Internet. The website address is www.motorolasolutions.com/investor.

At this time, all participants have been placed in a listen-only mode, and the line will be opened for your questions following the presentation.

I would now like to introduce Mr. Chris Kutsor, Vice President of Investor Relations. Mr. Kutsor, you may begin your conference.

Chris Kutsor -- Vice President of Investor Relations

Thank you. Good afternoon, and welcome to our 2018 third quarter earnings call. With me today are, Greg Brown, Chairman and CEO; Gino Bonanotte, Executive Vice President and CFO; Jack Molloy, Executive Vice President, Products and Sales; and Kelly Mark, Executive Vice President, Services and Software. Greg and Gino will review our results along with commentary, and Jack and Kelly will join for Q&A.

We've posted an earnings presentation and news release at motorolasolutions.com/investor. These materials include GAAP to non-GAAP reconciliations for your reference. During the call, we reference non-GAAP financial results including those in outlook unless otherwise noted. A number of forward-looking statements will be made during this presentation and during the Q&A portion of the call. These statements are based on current expectations and assumptions that are subject to a variety of risks and uncertainties. Actual results could differ materially from these forward-looking statements. Information about factors that could cause such differences can be found in today's earnings news release and the comments made during this conference call in the Risk Factors section of our 2017 Annual Report on Form 10-K and in our other reports and filings with the SEC. We do not undertake any duty to update any forward-looking statement.

And with that, I'll now turn it over to Greg.

Gregory Brown -- Chairman of the Board, Chief Executive Officer

Thanks, Chris. Good afternoon, and thanks for joining us today. I'll now share a few thoughts about the overall business before Gino takes us through the results and the outlook. First, Q3 was another strong quarter, we grew revenue 13%, grew EPS 27%, and generated more cash compared to last year on continued strength in both segments. Second, I'm encouraged with our continued backlog growth, which is up over $0.5 billion compared to last year and now sits at a Q3 record ending $9.5 billion, and does not yet include over $2 billion of expected backlog related to the Airwave and ESN extensions or the State of Florida award. And finally, based on our Q3 performance, we're raising our earnings outlook again for the full year. We now expect earnings per share to be in the range of $7 to $7.05.

I'll now turn the call over to Gino to provide additional details on Q3 results and outlook before returning for some closing thoughts.

Gino A. Bonanotte -- Chief Financial Officer, Executive Vice President

Thank you, Greg. Q3 includes revenue of $1.9 billion, up 13% from last year, including $145 million of revenue from acquisitions and $19 million of revenue related to the adoption of accounting standard 606. Organic revenue, which excludes acquisitions and the accounting changes was up 4% in constant currency. GAAP operating earnings were $294 million down $53 million from last year due to an increase to a legacy environmental reserve. Non-GAAP operating earnings were $452 million, up $40 million or 10% from the year ago quarter and higher revenue. Operating margins were 24.3% of sales, down 70 basis points from last year due to acquisitions. GAAP earnings per share were $1.43, up 14% from $1.25 last year. Non-GAAP EPS was $1.94, up 27% from $1.53 last year on higher revenue and earnings, as well as a lower tax rate. Ending backlog was $9.5 billion, a Q3 record, and was up $572 million or 6% compared to last year.

Products and Systems Integration backlog was up $277 million or 9%, and Services and Software backlog was up $295 million or 5%. Q3 Products and Systems Integration revenue was $1.3 billion, up 10% primarily on acquisitions and organic growth in North America. Q3 Products and SI operating earnings were $276 million or 21.4% of sales, down 290 basis points from last year, primarily on higher OpEx related to acquisitions and lower gross margins associated with Systems Integration and a few large projects. We expect full year 2018 operating margins for the segment to be approximately 21%. Products and SI segment backlog ended the quarter at $3.3 billion, up $277 million or 9% versus last year with growth in all regions. Sequentially, Products and SI backlog was up $118 million or 4%.

Q3 Services and Software revenue was $574 million, up $103 million or 22% from last year with growth in every region. This includes $49 million from acquisitions. Services and Software operating earnings were $176 million or 30.7% of sales, up 370 basis points from last year, driven by higher sales and favorable gross margin mix. We expect full year 2018 operating margins for this segment to be approximately 28%, and continue to expect full year 2019 margins of approximately 30%. Services and Software backlog ended at $6.2 billion, up $295 million or 5% versus last year, driven by the Americas and Asia-Pac. Sequentially, Services and Software backlog is down 1% including approximately $135 million of Airwave revenue recognition.

Total OpEx in Q3 was $464 million, up $78 million from the year ago quarter, due to acquisitions and ASC 606. For the full year, we continue to expect OpEx of approximately $1.8 billion. Other income and expense was $43 million compared to $41 million in the year ago quarter. Net interest expense was $59 million compared to $52 million a year ago. The Q3 effective tax rate was 18% compared to 30% last year due to 2017 tax reform. Return to provision adjustments booked in the quarter and tax benefits related to share-based compensation.

Turning to cash flow, Q3 operating cash flow was $338 million compared to $270 million last year. The increase was driven by higher earnings and improved working capital. We continue to expect approximately $1.4 billion in operating cash flow for the year excluding the $500 million pension contribution in Q1. Free cash flow was $292 million. Capital expenditures were lower by $39 million compared with last year on lower spending in IT and real estate. Additionally, we repurchased 20% of the Silver Lake convertible note for $369 million. The $200 million of principal was repaid in early Q4 with a new senior unsecured debt, and the $169 million conversion premium was paid with cash in Q3. We also fully repaid the remaining $300 million revolving credit facility associated with the Avigilon acquisition. $200 million was repaid during the quarter and $100 million was paid subsequent to quarter end. Additionally, we currently expect to repay the $400 million bank term loan associated with the Avigilon acquisition in 2019.

Looking at regional results. Americas revenue was up 16% and growth in both segments. The region saw strong demand for LMR products and services, command center software and video solutions. Q3 backlog is up approximately $480 million year-over-year. EMEA revenue was up 12% and was also driven by growth in both segments. Q3 backlog is down approximately $100 million compared to last year, inclusive of over $500 million of Airwave revenue recognition. And in Asia-Pac, revenue was down 1% with growth in Services and Software offset by Products and SI. Backlog is up approximately $200 million.

Turning to our outlook. We expect Q4 sales to be up approximately 13% with non-GAAP EPS between $2.50 and $2.55. This assumes $25 million of FX headwinds at current rates, a weighted average diluted share count of approximately 173 million shares and an effective tax rate of approximately 25%. For the full year, we continue to expect revenue growth of approximately 14.5%. We now expect non-GAAP EPS of $7 to $7.05, up from $6.79 to $6.89. This assumes a weighted average diluted share count of approximately 172 million shares and an effective tax rate of approximately 22.5%. Our guidance reflects an expectation of minimal impact from tariffs, given our very limited exposure to China.

Finally, I'd like to end with some notable highlights. During the quarter, we were awarded a contract valued at over $50 million to replace an existing TETRA network in Europe. A $21 million P25 network and device order from the city of Indianapolis in Marion County, Indiana. And $18 million order from Chesterfield County in Virginia to upgrade our computer aided dispatch and records management solution, providing a unified experience across emergency call handling, command and control, and management of records in evidence. And $19 million 10-year contract from the City of Las Vegas for our CommandCentral Vault digital evidence management solution. CommandCentral Vault integrates with our customers existing software applications for computer aided dispatch and records management. And now consolidates evidence and content from a wide variety of sources into a single platform.

I'd now like to turn the call back over to Greg.

Gregory Brown -- Chairman of the Board, Chief Executive Officer

And thanks, Gino. Let me close with a few thoughts. First, I'm very pleased with our Q3 results that were led by North America. We see strong demand across land-mobile radio products, Services and Software, and the Avigilon acquisition continues to perform ahead of our expectations. Second, I like our momentum in the Services and Software segment. Q3 was another strong quarter for our services business as well, and we are seeing continued traction with the recent command center wins that highlight the power of our end-to-end software suite. And while there's more work to do, I remain excited about the recurring revenue, margin expansion and earnings potential of this segment going forward.

And finally, as I look ahead, I feel good about our competitive position, we have a compelling portfolio serving vibrant segments of large addressable markets. We have a strong team focused on consistent execution, a healthy balance sheet and durable growing cash flows that provide flexibility for continued shareholder returns.

I'll now turn the call back over to Chris.

Chris Kutsor -- Vice President of Investor Relations

Thank you, Greg. Before we begin taking questions, I'd like to remind callers to limit themselves to one question and a follow-up, so that we can accommodate as many people as possible. Operator, would you please remind our callers on the line, how to ask a question.

Questions and Answers:

Operator

Floor is now open for questions. (Operator Instructions) Thank you. Our first question is coming from George Notter with Jefferies. Please go ahead.

George Notter -- Jefferies -- Analyst

Hi. Thanks a lot guys. Hey, I wanted to -- I guess start-off by looking at the Q4 guidance. If I look at your revenue guidance, the tax rate shares from these seems to apply something like 28% operating margin. And if I look back to year ago or even two years ago, you guys were operating at, somewhat higher operating margins in Q4, again, it's a seasonally strong quarter, but could you walk through kind of where that operating margin kind of math looks in your eyes, is that 28% number is about right. And then, is it conservatism or is it some of the costs you're carrying with some these M&A deals just kind of talk through profitability there, that would be helpful? Thanks.

Gino A. Bonanotte -- Chief Financial Officer, Executive Vice President

Yes, George. This is Gino. That looks about right. And I'll remind you that the acquisitions, operating margin percentage is down, obviously, earnings are up, it's related to acquisitions and a little bit of ASC 606, as well.

George Notter -- Jefferies -- Analyst

Got it. Okay. And then on the tax rate, you kind of talked about a little bit higher tax rate that you guys put up certainly here in Q4, and then I think maybe even your modeling for Q3, and then what's your modeling for Q4. Can you just talk about kind of what's going on in tax rate and how you see the outlook there going forward? Thanks.

Gino A. Bonanotte -- Chief Financial Officer, Executive Vice President

Yes. So, from a tax rate perspective, maybe it's instructive to start with Q3. So Q3, 18% versus 30% last year, about half of that George is related to the tax legislation. The other half is split between return to provision, estimates and deemed dividends and stock compensation. So, as we look forward, we guided the 22.5 ETR for the full year. And as we look into next year a little bit, the tax rate, our expectation is somewhere at 24% to 25%. So Q3 was a little bit -- a little bit lower rate based on those couple of items.

George Notter -- Jefferies -- Analyst

Great. Okay. I'll pass it on. Thank you.

Gino A. Bonanotte -- Chief Financial Officer, Executive Vice President

Thanks.

Operator

Our next question comes from Adam Tindle with Raymond James. Please go ahead.

Adam Tindle -- Raymond James & Associates, Inc. -- Analyst

Okay. Thanks, and good evening. I just wanted to start, first acknowledge the Q3 profit dollar growth was still very solid, but non-GAAP OpEx is growing faster than gross profit dollars and guidance suggests this will continue. Maybe you could just talk about the drivers to this and how you think about the timing to reverse this trend, it sounds like there's some leverage on operating margin in Services and Software, but maybe touch on products margin as well since it looks like that's where the margins have been declining? And then I have a follow-up. Thanks.

Gino A. Bonanotte -- Chief Financial Officer, Executive Vice President

Sure. Adam, this is Gino. So, we'll start from an OpEx perspective. Really the increase is related to acquisitions. There's also a little bit of the ASC 606, but it's acquisition related, and clearly as we continue to grow revenue in those acquisitions that will offset the incremental OpEx. The base business, the expectations haven't changed from the beginning of the year. We continue to drive cost reductions, frankly, in the base business, offset by increases in OpEx. From a -- the second part of the question was operating margin for PS&I. Yes, so the way to think about PS&I is obviously, PS&I now includes a systems integration, and it also includes some of the acquisitions and the additional cost in the acquisitions, both from a BGM perspective, and frankly, from a gross margin perspective as well based on current volumes. So, we do expect PS&I gross margin to expand, and we expect to end the year, I think, I mentioned in my prior comments to end the year at approximately 21%. We expect that to expand anywhere between 100 and 200 basis points in 2019.

Adam Tindle -- Raymond James & Associates, Inc. -- Analyst

Okay. And just as a quick follow-up. Greg, I wanted to ask a little bit more on software, how integrated is that business into the rest of the company. I know you've got some new segmentation, I would imagine there's some separation there and if the market is not giving you credit for it, would you think about strategic optionality whether that's an IPO or a sale or something like that?

Gregory Brown -- Chairman of the Board, Chief Executive Officer

No. I think, Adam, it's pretty integrated with our business, and I think it's -- I think of the software, and I think about the critical importance driven by command center software. So, I think of three legs of the stool, I think of our land-mobile radio business, I think of our command center software business, and I think of our video business through Avigilon, and then services that integrate or wrap around all three. So, as we've said that, that segment is pretty much a proxy for recurring revenue of the firm. I think Andrew Sinclair on the software side, Kelly obviously inherits now the entire segment with Bruce Brda's retirement. I feel good about this segment and its integration and in a relatedness with our business as a whole. And you saw the strong performance in Q3, and as Gino talked about, I think there's gross margin and operating margin expansion for sure in 2019, and quite frankly beyond. So, I think it's a key -- very key part of our strategy, and I think about it in an integrated way from a company perspective.

Adam Tindle -- Raymond James & Associates, Inc. -- Analyst

Got it. Thank you.

Gregory Brown -- Chairman of the Board, Chief Executive Officer

Sure.

Operator

Our next question comes from Keith Housum with Northcoast Research. Please go ahead.

Keith Housum -- Northcoast Research Partners LLC -- Analyst

Good evening, gentlemen. Thanks for the opportunity to ask question here. Just as we think about Avigilon, it's been your hands now about six months, two quarters and plus some, just thoughts on how that business is progressing, obviously, there's been some challenges within the Chinese competitors, given Avigilon competitive advantage, but a little bit of color on how that business is doing and thoughts about it going forward?

John P. Molloy -- Executive Vice President of Worldwide Sales

Okay. Keith, it's Jack. So, in terms of Avigilon, obviously, we announced the acquisition in early February this year through two quarters, a little bit more in two quarters, the business frankly has exceeded our expectations. So the market is about $12 billion ex-China, which has been growing at a 5% growth rate. We're essentially tripling that growth rate in the market. We are making investments in go-to-market and continue to make investments in the portfolio as well. And we see continue leveraging growth for that business into 2019, so it's performing very well.

Gregory Brown -- Chairman of the Board, Chief Executive Officer

And I'd add that, especially with the recent legislation around the National Defense Authorization Act, that prohibits the procurement of Chinese content with video surveillance, specifically Hikvision and Dahua, the opportunity is even greater than we originally thought, I think both for the federal market for sure, and we haven't had any traction, so to speak, given the sales cycle on state and local. So, I'm pleased with the way Jack is running it. Remember, we're operating it as a fully contained subsidiary, but it's also important to note, we're investing. We are investing in go-to-market distribution, and we're investing in development to further extend our portfolio and product lead, feels very good about that acquisition.

Keith Housum -- Northcoast Research Partners LLC -- Analyst

Great. I just have a follow-up to change the gear slightly here -- to the ESN, how should we think about the ESN, and when you might be, let's say monetize that, is there anything that we can look at it as a factors about when that will start?

Gregory Brown -- Chairman of the Board, Chief Executive Officer

So, we still anticipate signing a contract for Airwave ESN extensions, we're targeting by the end of the year. I mentioned that in my backlog comment, none of that is the extension piece are not reflected in backlog. Airwave is about, and I know you talked about ESN, but just to put a marker down, Airwave is about $1.45 billion through that three-year extension, and ESN, the extension what they call the CAN (ph) agreement would be signed at the same time. I think our expectations for ESN specifically, which is your question is reasonably modest for 2019, I think it will take some traction to get utilization and final definition and agreement, but the Airwave extension is pretty cut and dry and clear for that three-year monetization of $1.45 billion. A lot of great work by the team here with the UK Home Office, feel good about both of those deals.

Keith Housum -- Northcoast Research Partners LLC -- Analyst

Great. Thank you.

Gregory Brown -- Chairman of the Board, Chief Executive Officer

Sure.

Operator

Our next question comes from Jim Suva with Citi. Please go ahead.

Joshua Kehoe -- Citigroup Global Markets -- Analyst

Hi. This is Josh Kehoe on for Jim. Thanks for taking our questions. Can you provide some more detail on what drove the year-over-year growth in Americas and EMEA. And are you seeing any high competitive pressure in APAC?

Gino A. Bonanotte -- Chief Financial Officer, Executive Vice President

Okay. Josh, so obviously for the Americas continued really, it's across the board. I mean, great performance in both Product and SI. We've grown and that's the LMR portfolio both to the government and commercial space, as well as Avigilon. And then the Software and Services business really that North America, the anchor point of that business and it performed very well in Q3, really it's performed very well all year. So obviously backlogs up 9% there, but good traction in the Americas. And EMEA, it's really been the story of Avigilon, and then the Products and Systems Integration, they're up as well. So pretty balanced story in both of our largest theaters, really. In Asia-Pac, frankly, the business has performed, we've grown in Asia-Pac this year, in fact, we plan to grow every theater that we operate within, but we've had some pressure in China, frankly, but I would remind everybody that our largest business in Asia-Pac is Australia. Australia performs exceptionally well for us. Australia in fact, is really, frankly, more than twice as big as China for us in the region, that's our anchor tenants in Asia-Pac, and so a little bit of competition in China and the surrounding area, but frankly, we continue to perform well in Asia-Pac, as well.

Gregory Brown -- Chairman of the Board, Chief Executive Officer

Yes. And I think that's the key. I think our Asia-Pac strategy has led largely by Australia as it relates to China. And as anticipated, it's not really significant against the overall composition of the firm. China represents about 2% of our overall revenue. We have about 170 employees in Mainland China. And as a part of a very concerted multi-year effort, we do not do manufacturing in China, we don't do product development, it is more about sales and sales support and go-to-market distribution.

Joshua Kehoe -- Citigroup Global Markets -- Analyst

Great. And are you seeing any change in the duration of your backlog? Thanks.

Gino A. Bonanotte -- Chief Financial Officer, Executive Vice President

No. Josh, this is Gino. No change to the duration of our backlog as we began offering the service, multi-year service offering, so that we did see a little bit of a duration extension in services as that represented revenue that would be realized over multiple years, but no change, certainly in 2018 to our expectation of the duration of backlog in either Products and Systems Integration or in Services and Software.

Operator

Thank you. Our next question comes from Vijay Bhagavath with Deutsche Bank. Please go ahead.

Vijay Bhagavath -- Deutsche Bank -- Analyst

Yes. Hey, good afternoon, Gino and Greg. Just a bigger picture question, the software command control in the context of managed services and also the vigilant business are clearly the pillars of the drivers of growth heading into next year and over the next few years. So, give us just some qualitative glimpse of how should we think of these two important growth drivers as we head into the new year? Thanks.

Gregory Brown -- Chairman of the Board, Chief Executive Officer

Yes. Actually, I think we're growing across pretty much all of our platforms. You talked about Software and Services and Avigilon, but I'm very pleased with the land-mobile radio business as well. Look, as we're not going to guide specifically on 2019, but the way we think about it currently is the segment of Product and Systems Integration is generally a low-single digit revenue growth business Services and Software all in, it's a high-single digit business. And our current thinking, I feel very good about our momentum, feel very good about our record Q3 backlog, but our current thinking is organic revenue growth constant currency next year, can be comparable to this year. And that's with about $80 million of FX headwinds for next year and that current thinking also contemplates no meaningful FirstNet revenue contribution next year. Now, having said that, from a linearity standpoint, we always have Q1 being much lighter than normal, as we look at the full year, and I think that, that kind of performance for '19 will be comparable to '18, but that's our current thinking.

Vijay Bhagavath -- Deutsche Bank -- Analyst

Okay. Very helpful. A quick follow on for --

Gino A. Bonanotte -- Chief Financial Officer, Executive Vice President

Vijay, this is Gino, just very quickly, the preponderance of that FX headwind is in the first half next year.

Gregory Brown -- Chairman of the Board, Chief Executive Officer

Good point.

Vijay Bhagavath -- Deutsche Bank -- Analyst

Okay. Gino, a quick follow on, on how should we think and what are your -- what's your thought process on OpEx as a percentage of revenue once again heading into next year? Thanks.

Gino A. Bonanotte -- Chief Financial Officer, Executive Vice President

Yes. So, Vijay, I'm not sure we're going to guide on all the elements of '19, but I think you can expect more of the same, we -- as Jack and Greg both mentioned investments in the acquisition, specifically in Avigilon in terms of go-to-market, in terms of R&D, but you can continue to expect very rigorous and disciplined attention to OpEx as we go forward into '19. And on the next call, we'll give you a more detailed view of what 2019 looks like.

Vijay Bhagavath -- Deutsche Bank -- Analyst

Okay. Thank you.

Gregory Brown -- Chairman of the Board, Chief Executive Officer

Thanks, Vijay.

Operator

(Operator Instructions) Our next question comes from Paul Coster with JPMorgan. Please go ahead.

Paul Coster -- JPMorgan -- Analyst

Thanks for taking my questions. Couple of picky (ph) ones, please. On the -- among the pro forma adjustments is an environmental reserve expense. So I see that there are some other charge number jumps this quarter, is this something that we'll see more of -- perhaps you can just give us some sense of what this is about and (inaudible)?

Gino A. Bonanotte -- Chief Financial Officer, Executive Vice President

Yes. Paul, this is Gino. No. You should not expect to see any more. This is a long-standing EPA site and related to one of our legacy businesses in Scottsdale, Arizona. And really what it represents is, if you look at the $57 million, about $20 million is additive costs, but from a cost perspective per year in 2019, the additive cost is about $800,000. So the cost is really related to an extension beyond 2039 of monitoring that we need to do in Scottsdale, both groundwater and vapor intrusion monitoring. There is -- and then there's also a change in the discount rate that we used. So, from a cash perspective, you shouldn't expect any different cash out position anywhere in the near-term, and certainly we don't expect any additional reserves on this particular item going forward.

Paul Coster -- JPMorgan -- Analyst

Okay. Got it. And then we've got this $25 million quarter of reorganization charges, so I think that was in both 2Q and 3Q, how long does this go on for -- why should we consider sort of one-time in nature rather than an ongoing expense?

Gregory Brown -- Chairman of the Board, Chief Executive Officer

Yes. That really -- it's really related to restructuring, Paul. And certainly, we don't expect for the organizations that we restructured, we don't expect that to recur again, so that's why it's in the call out (ph).

Paul Coster -- JPMorgan -- Analyst

So that's done, so we shouldn't see that again after this point?

Gregory Brown -- Chairman of the Board, Chief Executive Officer

Yes. Certainly, I mean, there may be other restructuring may do, but certainly not the restructuring that we did in Q2 and Q3.

Paul Coster -- JPMorgan -- Analyst

Okay. Got it. All right. Thank you very much. It's helpful.

Gregory Brown -- Chairman of the Board, Chief Executive Officer

Certainly.

Operator

Our next question comes from Tim Long with BMO Capital Markets. Please go ahead.

Tim Long -- BMO Capital Markets -- Analyst

Thank you. Just wanted to ask on the LMR business. It is the two-part there and then a follow-on for Gino. Just (inaudible) deal was obviously a large one, any other big deals out there that are being contemplated at this time. And related to that, any -- I think in the past quarter or two, you've talked about some new product launches or opportunities in the LMR area, any comments on that. And then just follow on for Gino, as we continue to move to a little bit more software here, when should we start to see a little bit more inflection or improvement in the gross margin line? Thank you.

John P. Molloy -- Executive Vice President of Worldwide Sales

Hey, Tim, it's Jack. I'll take the first one, and then pass the baton to Gino. So first of all, I think the first part of the question was related to big deals, obviously, in Greg's intro, we talked about the State of Florida, which is frankly the biggest statewide project. It was a legacy Harris customer that we've been awarded. So we have that and we have multiple other statewide upgrades that we're in pursuit of. The LMR project business remains, frankly, it's very robust. I would tether that comment to the fact that the team has executed very well, with the portfolio that we've got a couple new product introductions, we have not announced the new product yet, but both from command center software, we've got a lot of the horizon there, but also some nice things here in 2019 related to our devices as well. So, the sales team is very poised, very excited to take that to market, but, so I think the combination of the market driver is stable, local revenue receipts being up, very good federal budget situation for us coupled with new product on the horizon, it's exciting times I think in the Project 25 and PCR business.

Gino A. Bonanotte -- Chief Financial Officer, Executive Vice President

And Tim, this is Gino. On gross margin, the question was specific to Services and Software, is that correct?

Tim Long -- BMO Capital Markets -- Analyst

Yes. It's kind of just overall, but yes, particularly as that mix improves, how do we think about in your kind of the --

Gino A. Bonanotte -- Chief Financial Officer, Executive Vice President

Sure. So let me start with Services and Software. We clearly expect gross margin expansion in 2018 versus last year, cut 250 basis points, and we expect continued expansion into '19, we talked about our expectation for operating margin to be approximately 30% in 2019 versus 28% in 2018. That's a combination of both, but we clearly expect to see continued margin expansion as we move forward in Services and Software, and that will result in margin expansion, overall as well.

Tim Long -- BMO Capital Markets -- Analyst

Okay. Thank you very much.

Gino A. Bonanotte -- Chief Financial Officer, Executive Vice President

Thanks, Tim.

Operator

I will now turn the floor back over to Mr. Chris Kutsor, Vice President of Investor Relations for any additional or closing remarks.

Chris Kutsor -- Vice President of Investor Relations

That will conclude today's call. Thank you for your time.

Operator

Ladies and gentlemen, this does conclude today's teleconference. A replay of this call will be available over the Internet in approximately three hours. The website address is www.motorolasolutions.com/investor. We thank you for your participation, and ask that you please disconnect your lines at this time. Have a great day.

Duration: 36 minutes

Call participants:

Chris Kutsor -- Vice President of Investor Relations

Gregory Brown -- Chairman of the Board, Chief Executive Officer

Gino A. Bonanotte -- Chief Financial Officer, Executive Vice President

George Notter -- Jefferies -- Analyst

Adam Tindle -- Raymond James & Associates, Inc. -- Analyst

Keith Housum -- Northcoast Research Partners LLC -- Analyst

John P. Molloy -- Executive Vice President of Worldwide Sales

Joshua Kehoe -- Citigroup Global Markets -- Analyst

Vijay Bhagavath -- Deutsche Bank -- Analyst

Paul Coster -- JPMorgan -- Analyst

Tim Long -- BMO Capital Markets -- Analyst

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